Trade policy response to the global economic crisis

Global trade fell by 12.5% in 2009, a collapse explained by factors such as a decrease in demand and the drying-up of trade finance. Although protectionism was not a major factor in this fall in trade, governments have faced pressure to implement protectionist policies and measures as a way of 'saving' domestic jobs and enterprises in the face of the economic crisis.

However, such measures would be counter-productive. Direct trade-restricting measures have the most negative impacts on growth and employment. An increase of $1 in tariff revenues results in a $2.16 fall in world exports and a $0.73 drop in world income.

This study argues that open markets will be necessary for a sustained economic recovery. It recommends that governments continue to resist protectionist pressures and work towards a level playing field for trade.

immediately, by helping to restore confidence, if governments work together in this direction,

over the short term, by avoiding protectionist responses that would worsen economic prospects,

over the medium term, by delivering real opportunities to return to stable economic growth.

International trade policy measures to underpin open markets are needed now more than ever.

Avoiding protectionism

Greater protectionism would delay the adjustments needed to respond to changing demand. Ultimately, greater and more costly adjustments would be required both within the ‘protected’ economy and globally.

Following the 1929 stock market crash, the United States increased import tariffs in the hope of protecting jobs. But the swift retaliation from other countries, historians and economists agree, deepened and prolonged the depression.

More recently, growth surged in countries such as China and India only once they began opening up their economies after years of relatively closed trade regimes.

Attempts to favour domestic industry through discriminatory procurement and “buy local” campaigns can be expected to backfire as others respond in the same way.

Video: Ken Ash, OECD Trade and Agriculture Director, on how consumers would pay the price if governments took protectionist measures.

By closing borders or restricting markets, consumers pay more, firms incur higher costs, and choice is limited – even in the short term. Consider a world with just two traders: you and me. If I no longer import from you, you no longer have the foreign exchange that is needed to import from me. And so on, across the globe. While an individual government might have some success with protectionist policies, as more governments employ the same approach, every country loses. Global protectionism means job losses, including in the relatively competitive export sectors.

Video: Keith Rockwell, WTO Head of Communications, on how the recent economic recession has strengthened the case for more open trade.

Protectionism does not just imply tariffs, quotas and other mechanisms that restrict trade or make imported products more expensive. A wide array of measures behind borders, such as direct subsidies, have similar effects.

Support to one sector in one country, whatever the motivation, disadvantages the rest of the economy as well as competing sectors in other countries.

As other countries then move to “level the playing field”, a subsidy competition is launched that in the end benefits no country. And once allocated, subsidies to deal with a short term problem are notoriously difficult to remove.

Poor countries which cannot afford to compete on the basis of subsidies will find themselves excluded from protected markets. The advances made in recent years by some developing countries, helped by trade, will be lost.

Stimulating growth

There is little standing in the way of governments willing to conclude the World Trade Organisation’s Doha Development Round of trade negotiations. Agreement on increasing market access to agricultural and industrial goods would pave the way for progress in other areas and limit protectionist reactions to the economic crisis. It would also make trade more predictable. This would be good for the economy as it would avoid the disruption to supply chains and to consumers caused when trade can be switched on and off.

Opening markets further would improve overall economic well-being, as resources could be used more efficiently through specialisation, economies of scale, international investment, competition and innovation.

The size of the economic gains from removal of remaining trade barriers is significant. According to OECD analysis:

A 10% increase in trade is associated with a 4% rise in per capita income.

An ‘open’ foreign direct investment climate could be expected to yield a ¾% increase in OECD area GDP per capita.

‘Lower’ regulatory barriers to competition could result in a 2-3% increase in OECD area GDP per capita.

Full tariff liberalisation in agriculture and industrial goods could increase global welfare a further 100 billion USD.

Much higher gains would be expected if services trade was liberalised.

While avoiding protectionism and opening markets further are necessary responses to the economic crisis, they are also insufficient. Jobs will continue to be lost and some sectors and regions will be hit harder than others. Government policies that provide temporary help for people who lose their jobs and need to find alternative employment, along with internationally coordinated fiscal and monetary measures that restore confidence, stability and growth in the global economy, will be much more effective than protectionism.

International trade in intermediate inputs such as computer components and raw materials helps businesses become more productive and competitive. Restricting this trade is more likely to result in firm closures and job losses.